Chapter 2, Problem 2.1.2P

To determine

Introduction: Acquisition is a corporate term used to represent purchase of another company and gaining the ownership of the company.

To prepare: Value Analysis as well as Determination and distribution of excess schedule.

Answer to Problem 2.1.2P

  $\begin{array}{l}\text{Value AnalysisTotal }\\ \text{Price paid 810000}\\ \left(\text{-}\right)\text{ Total fair value of Net Assets }\left(\text{430000}\right)\\ \text{Goodwill }\overline{\overline{\text{ 380000 } }} \end{array}$

Acquisition cost     $40000$

Determination and distribution of excess schedule

  $\begin{array}{l}\text{Inventory 20000}\\ \text{Land 50000}\\ \text{Building 30000}\\ \text{Equipment (10000)}\\ \text{Goodwill }\underset{\_}{\underset{\_}{380000}}\\ \text{Total }\underset{\_}{\underset{\_}{\text{470000}}}\end{array}$

Explanation of Solution

Acquisition is a corporate term to define buying all of another company and gain the ownership of the company.

Identify the acquirer: for acquisition it is very important for acquiree’s to know the acquirer.

Following things should be kept in mind voting rights, large minority interest, governing body of combined entity and terms of exchange.

Determine the acquisition of the company.

Measures the fair value of acquiree: the fair value of the aquiree as an entity is assumed to be paid by the acquirer. The price includes the contingent consideration, the costs of acquisition are not included in the price of the company acquired and expended.

Record acquiree’s assets and liabilities that are assumed: the fair value of all identifiable assets and liabilities of the acquire are determined and recorded.

Goodwill results when the price paid exceeds the fair value of net assets. Gain results when the price paid is less than the fair value of net assets.

Contingent consideration: contingent consideration is consideration given on the happening or non-happening of event. It is generally added in purchase consideration and increase goodwill.

Calculation:

  $\begin{array}{l}\text{Value AnalysisTotal }\\ \text{Price paid 810000}\\ \left(\text{-}\right)\text{ Total fair value of Net Assets }\left(\text{430000}\right)\\ \text{Goodwill }\overline{\overline{\text{ 380000 } }} \end{array}$

Acquisition cost      $40000$

Company Fair Value	$810,000	$810,000
(-) Book Value of Interest Acquired
Common Stock ($1 par)	$20,000
Paid-in capital in excess of par	$180,000
Retained Earnings	$140,000
Total Equity	$340,000	$340,000
Interest Acquired		100%
Book Value		$340,000
Excess of Fair Value over Book Value		$470,000

  $\begin{array}{l}\text{Total Assets }\\ \begin{array}{l}\text{Other current assets 70000}\hfill \\ \text{inventory 80000}\hfill \\ \begin{array}{l}\text{Building 150000}\\ \text{Land 90000}\\ \text{Equipments 100000}\\ \text{Total Assets (A) }\underset{\_}{\underset{\_}{490000}}\end{array}\hfill \\ \begin{array}{l}\\ \text{Total Liabilities }\\ \text{Current liabities 60000}\\ \text{Total Liabilities (B) }\underset{\_}{\underset{\_}{60000}}\\ \text{Total net assets (A-B) =}\underset{\_}{\underset{\_}{430000}}\end{array}\hfill \\ \hfill \\ \hfill \end{array}\end{array}$